Trying to get ahead? Pru says, "Get uncomfortable!"
Like it or not, life throws a ton of crap at us. We cannot plan for everything but we can prepare for a really shitty situation.
If you are looking to change things financially or want to build some layers of security, I recommend mentally figuring out the worst situation. But keep it in the realm of possibilities that you can quantify. For most of us that means:
Job Loss
This could be your job loss, your partner's, a parent or family members, even your roommate's. The bottom line is it is going to affect you - big time. No job and the basics don't get paid.
Budgets are very personal. Look to articles, other people's budgets and tracking systems, etc. for ideas, but the numbers that you put down have to be related to your situation.
That means you have to have an idea of what you spend, what your basic expenses are as well as what you earn. Once you have determined those numbers, then you can go to the "worst" situation.
I like using job loss because you can more easily quantify the impact. And also because depending on your industry you can also determine the likelihood of losing your job (e.g. if you are in a cyclical industry). Of course other things can happen such as a medical issue but unless you have a known medical or health problem, it can be difficult to plan for this.
Now back to job loss. Ask yourself, ask your colleagues if you need to, if you were to lose your job, how long would it take you to find another job in the same industry/doing the same thing. This is where it can get really uncomfortable because often the answer isn't pretty.
Assume you lose your job. Your initial reaction is probably anger, shock, fear. Your second reaction is likely to go find another job. Now you are not going to look for just any job. Your goal is to be able to pay your bills and provide for yourself and possibly your family as soon as possible. You turn to what you know and that's usually what you've been doing in the most recent position. (That isn't always the best decision because again it depends on exactly your situation but it is the most likely case.)
How long will it take for you to find a similar job with a comparable salary?
Only you can answer that question. But once you do, in my opinion, that is the number of months you should have in an emergency fund - if you are single or are the sole provider.
If you have a partner who also works then you should consider their salary as well as their potential job loss. It's an individual situation that only you can answer. But as an example, I knew a married couple who both worked in the same industry and back in the 2008-2009 during the last recession they were both laid off within 3 months of each other. It wasn't pretty and it took them both a long time to find another job.
It happens. Probably a lot more than we would like especially in certain towns and certain industries where you have one or two main employers or if you meet and fall in love on the job.
If you are planning for the future you have to have a contingency or back-up plan for when things get crazy and ugly. If you don't have an emergency fund or if it may be on the lighter side, that needs to be factored into your budget. You may only add a few bucks to it each month, but those few bucks could help pay a utility bill or buy groceries in a bad month.
Generally no one likes to think about the bad things that can happen. But it gives you an enormous amount of confidence just facing the numbers head on and saying I have a plan. This doesn't mean it can be done overnight. It may take a very long time. But no one said it would be easy.
Shortly after I graduated university (eons ago), I attended an alumni event focused on personal finance. I remember it was a really good event with the audience actively participating and asking a ton of questions. The following year my university held another alumni personal finance event very similar to the first one. This woman stood up and she said something to the effect of, "I attended this event last year. It's been 12 months and it has taken me all of those 12 months to save up one month of my emergency fund."
I got to know this woman later and she was working for a nonprofit and barely making any money. I remember her and her boyfriend (I believe he was a young lowly paid teacher) would once or twice a month go out and they would share a $6 sandwich and that would be their treat. No drinks just the sandwich purchased with money that could have bought a lot of groceries for them.
She continued with, "This year it will be easier to keep saving. I think I'll be able to save another 1.5 or 2 months. It has taken a long time but now I have separate savings just in case something happens." Yeah...it may take a very long time. But that isn't what matters.
Identifying the potential need and working towards it is what matters. Something can happen before you get to the goal but at least you will have a small cushion to fall back on.
Really think about your situation and who is depending on you. Take me as an example. I am single but do have family that depend on me (and will more so in the future). Just focusing on me, I have a senior-ish position in a specialized industry. Oh and I'm not a kid. If I lose my job today, I can't find another tomorrow or the next day.
First of all, I am assuming that I was laid off and not fired. That is important because if my company is laying off people, there is a chance others are too. (Problems in the industry or the general economy?) If that is the case there are going to be others in the market looking for jobs. But there are not going to be as many jobs because companies will be eliminating positions. Now in this situation, I have known people in my field at about my position that found a new position in 12-18 months.
12-18 months is a long time. A very long time. But I know that number and so I know what could be a problem for me. I now have something that I can work with as I plan my budget.
Additionally, I earn a high enough salary (I'm no spring chicken!) so it is questionable as to whether I could even find a comparable salary. Some companies might prefer someone one or two levels below me who earn a lot less. This means I may have to take a pay cut.
In this scenario (which is very realistic because this does happen to older workers), it's not only impacting my calculation of an emergency fund (12-24 months to be safe) but it should also be informing my thinking about current and future expenses. I should be realizing that if things are happening in my industry or in the economy at large that look to potentially impact me or my company, I need to quickly think about what I am spending because should I lose my job and end up with a lower paid one, how will I cover my basic expenses? Do I have a buffer between income and expense (i.e. left over monies, or savings)? How much flexibility do I have?
A lot to think about! The important thing is to do the thinking. And to tailor it to your personal situation. Don't just say I need to have or start budgeting for 6 months of income for my emergency fund. You may need 3 or you may need 12.
And remember this isn't a one time deal. Consistently budgeting means consistently assessing and evaluating where you are, where you want to be as well as the risks to those two things.
No it's not a huge amount of fun when you work through what could happen in a job loss situation. Over the years I have built up about 2 years worth of expenses and it is kept in a combination of cash and easy-to-access mutual funds (not the subject of this blog). It is money I can't spend but in my situation I have to rely on myself (no family, friends who could support me and my expenses).
Think about it and crunch some numbers!
Pru
This is so absolutely true! In our area, hundreds of people lost their jobs in the oilfield with very little warning. Many were assured their jobs were safe only to be locked out of their trucks/office one day and escorted off the property. For real!
ReplyDeleteSomething like 35,000 jobs were lost in the province of Alberta (population 4.1 million) in a matter of months. Many of those people bought houses during a boom so have rather huge mortgages and possibly large payments on the equipment they needed to perform their work. It was devastating and still is. Entire neighbourhoods went up for sale overnight which of course killed the price of real estate. There are so many factors at play. Even if not directly related to the oil patch, most people rely on that oil money in one way or another--be it the waitress who no longer makes any tips or the carpenter that no longer has work building houses out here. I could go on and on. But my point is that many of us felt pretty secure with 6 months expenses saved up (something I was very proud of, in fact). All it took was a company nearly going bankrupt while they owed us a huge invoice (thankfully they paid although it took almost 4 months), one major job fell through so there was suddenly no income, and in the meantime we had bought a new truck because we were expecting 1)to be paid on time and 2)for the big upcoming job to require the more reliable vehicle and quickly start paying for it. That was a stressful time. Suddenly my 6 months of expenses I had saved up wasn't a drop in a bucket. What you say about assessing how long it would take for you to find similar work is very true. In the event of an industry wide collapse, many people here were over a year finding work and in many cases it wasn't comparable in pay.
Many of our friends and neighbours experienced worse than us. We were lucky in that my husband has stayed quite busy in his field. I've taken on a couple side gigs for my own peace of mind. Although not much money, it goes directly to savings. While I still have a little sidekick at home I hope to afford to be here with him but next year he starts kindergarten (every second day) and I will reassess my plan then.
Great, wise words here Pru! Thanks! And Merry Christmas to you!
Merry (belated) Christmas Jill! And thank you for this comment!
DeleteThe past 2 years have been really rough on the oil industry. (I actually think our Houston/Gulf of Mexico area was impacted just before the Alberta region. Not 100% sure but I recall reading certain articles and Canada was still going strong. Then a few months later it impacted you guys.) Going back a few more years and you see the coal areas too were impacted. And going back further, in the last recession in the U.S. you saw so many areas that were impacted (industries and regions).
As you mentioned, it's not just job loss it is also impacting real estate which is like a double blow.
I remember reading articles about NYC at the time because the financial industry was really hard hit. Well all those high flyers (and their companies) rely on various armies (car service/taxis, restaurants, nannies, housekeepers etc.) to ensure the employees can keep working hard and earning money. Suddenly those industries/companies/families were also impacted.
Of course charities are also impacted because people have less to give - and it is during a time when more people need more assistance from charities.
It is like a never ending circle when things get bad. All you can do is save what you can before it happens and pray/hope it is enough to sustain you. Then rebuild rebuild rebuild.
Hope the rest of your week is lovely!